Why closet indexing may not be so bad

Closet indexers may have their feet up – but some have outperformed their busier rivals

Source: Corbis

By

Andrew Pearce

January 19, 2015 Updated: January 22, 2015 1:09 p.m. GMT

They had been depicted as the bad boys of the buyside, the ones who have given the skilled practice of active fund management an inglorious name. So much so that, in recent months, closet indexers have drawn scrutiny from Scandinavia, UK and even the European Securities and Markets Authority.

Closet indexing involves fund managers charging the high fees associated with the brain-intensive job of picking stocks and then simply buying the stocks in an index, something that could be done by computer at much lower cost. It is...